Published on April 24th, 2019 | by Kyle Field0
Tesla Investor Conference Call — Model S & 3 & X Demand, Insurance, Financials, Gigafactories, Etc.
April 24th, 2019 by Kyle Field
Tesla announced its earnings for the first quarter of 2019 with its usual letter that summarizes the financial milestones hit and missed throughout the quarter. The highlight of Q1 2019 is clearly the fact that Tesla was not profitable for the first quarter since achieving profitability in Q3 of 2018, but the full story is much more complex than just the headlines that will populate the nightly news at all the usual mainstream media outlets.
Dig into the letter yourself by downloading it from Tesla’s Investor Relations site or refresh this article for all the updates from the letter and the quarterly earnings call as they unfold. Tune into the call directly by heading over to CleanTechnica’s livestream of the call on CleanTechnica TV or head over to Tesla’s Investor Relations site.
Highlights from Tesla’s quarterly letter:
- GAAP operating loss of $522M
- GAAP net loss of $702M, including $188M of non-recurring charges
- Cash and cash equivalents of $2.2B at Q1-end
- Model 3 gross margin ~20% in Q1
- Revealed Tesla Model Y (March 14th)
- Started production of Full Self Driving computer
- Tesla paid off the $920 million convertible note in Q1 2019
- Tesla produced on the order of 63,000 vehicles in Q1 2019. This is a 3% increase vs previous quarter.
“Production of vehicles for overseas markets started in Q1. This required significant effort for Tesla and resulted in an inventory build for overseas markets at the front half of the quarter, with shipments loaded into the back half of the quarter. The last 10 days of the quarter, specifically, saw the bulk of the deliveries as Tesla pushed to unload the inventory it had built up in the front half of the quarter.
“Tesla filled the pipeline of Model 3 shipments to European and Chinese markets. This significantly increase the in-process inventory. Dropping prices in Q1 puts pressure on automotive margins. We need to work through this in Q2, impacting profitability.”
On to the conference call …
Elon: We need to do better at spreading our deliveries out over the quarter, versus batching them up in a quarterly cycle that results in chaos at the end of the quarter as we sprint to meet our production and delivery targets. Will be “unwinding the wave.”
Elon on pricing changes and store closures: “we certainly didn’t handle messaging well.” (Indeed.) We will actually continue to add stores in areas where it makes sense, but we will also continue to close stores where they don’t make economic sense. “It’s actually just common sense,” Musk said. “The stores are essentially like information centers, where you take test drives, buy some merchandise.”
Zachary Kirkhorn, Tesla CFO: Model 3 ASP was close to $50,000 in Q1.
Even though S & X have been on the market for years, Tesla continues to make operational/production improvements.
Q: Will Tesla be able to complete their purchase of Maxwell Technologies? What is holding that back?
Tesla Answer: “Right now we’re just going through approvals with the SEC. There’s not a whole lot of things holding it back. We’re on schedule, we’re on track. Right now we’re hoping to close in mid May.”
Question: “Is Tesla considering creating an insurance program in order to further simplify the owner experience and to more accurately take into account safety of driving on Autopilot?”
Elon: “Yes, we are creating a Tesla insurance product, and we hope to launch that in about a month. It will be much more compelling than anything else out there.”
Question: How quickly will you be able to integrate Maxwell Technology tech into batteries?
Elon: Haha. “We’ll probably have an investor day later this year or early next to go over the cell and battery technology and future strategy and that will be very informative. We do recognize the criticality of this,” Musk said.
Q: “When and where will the Tesla Semi production begin?”
Jerome Guillen: “We’ll start production later next year.” Making all batteries and drive units in Sparks, “Northern Nevada.”
Elon: “The prototypes are working amazingly well. … We even used them to deliver some Model 3s [in Q1].”
Full Self Driving
Elon: FSD hardware 3 is not worth getting for another 2–3 months because the software for it has not caught up with hardware 2.5.
(For more on Full Self Driving, see our extensive Tesla Autopilot archives.)
Elon: Model Y vehicle production should be in California (Fremont) or Nevada (Sparks). We expect to make a decision on this very soon. We have ordered the equipment for the new lines already. It’s a very close call between Fremont factory or Gigafactory 1 (GF1). We hope to make a decision in the next few weeks.
Tesla seeing strong demand for all vehicles. The Model 3 Standard Range Plus is a really compelling offer, and Tesla is seeing strong demand for it.
People were waiting for an upgrade on the S & X, it seems, and they’re now seeing an uptick in demand and expect that to be quite significant. (Also worth noting from elsewhere in the call: S & X production was down in Q1 due to Tesla prepping for the upgrade/change.) Tesla’s best guess is returning to the 100,000 units/a year production and demand rate for S & X, but they don’t have a crystal ball.
Question from Ryan J. Brinkman, JP Morgan Chase & Co.: How could Tesla build Model Y in Fremont if it’s already at capacity? “Is anticipated demand for Fremont-built vehicles less than was previously thought, or have you managed to maybe find more capacity in Fremont — for example, with the tent or some other production method?
(Kyle: It’s technically a sprung structure, commonly used around the world as semi-permanent structures for all sorts of applications.)
Elon: “We feel that we can actually append building space to the — basically, to the west side of the building — and use a lot of internal space that’s currently used for warehousing in our Fremont factory, and so we believe it actually can be done with minimal disruption to add Model Y to Fremont.” [Editor’s note: Having just been in Fremont, this answer makes a lot of sense and I could very well see that happening.]
Question: What was the initial order intake on Model Y?
Elon: We don’t want to comment on this as people read into deposits too much.
Question from Pierre Ferragu, New Street Research: “Where will we see in Q2 pain points, where in Q3 and Q4 you had a profit for similar volumes? How much of the loss in Q2 will be one of cost? How much is price points coming down in the mix? And how much is related to pricing and other things?
Elon gave a long answer that wasn’t very clear but indicated it was due to their efforts to unwind their global delivery “wave” in Q2, which helps Tesla’s working capital through the quarter and also is better for customers.
Zach Kirkhorn added that the price adjustments also contribute (since that brings down ASPs a bit).
Adam Jonas of Morgan Stanley: “There’s so much drama around Tesla’s share price and quarterly results. From the outside at least, it just looks like a huge distraction. And at the same time, there’s so much alternative capital, and large amounts of strategic capital that is incrementally deployed in domains where Tesla has real leadership. So, how important is it for Tesla to be a publicly traded company, Elon?”
Elon: “Well this may, I don’t want to surprise you but — I’d prefer that we were private. Unfortunately, I think that ship has sailed.” (Semi joking, but not really.)
“Being public, the sort of price of the stock is being set in a manic depressive way. I think Warren Buffett’s analogy is, being a publicly traded company is like having someone stand at the edge of your home and just randomly yell different prices for your house every day — still the same house.
“It’s a bit of a distraction sometimes … but I’m not sure what to do about it.”
Adam: “Okay, I understand. Thanks.”
Later on the call, another questioner, A.M. Sacconaghi of Sanford C. Bernstein & Co., came back to the topic of a capital raise. “Aren’t you, potentially, trying to go through a very thin space while trying to grow quickly and be self funding? Which, quite frankly, may be unrealistic. Why not raise capital? Why do you view that as something Tesla shouldn’t do, or wouldn’t do?”
Elon noted he didn’t think raising capital should be a substitute for making the company operate more effectively. He said he thought it was important to have strong financial discipline at the company and be frugal. “If we just raise capital every time, we don’t have the forcing function for improving the fundamental operation of the business. So I think it is healthy to be on a spartan diet for a while.”
“At this point, I do think there is some merit to raising capital.” He also noted, though, that he doesn’t think capital has been a constraint on Tesla’s growth so far.
Tesla is on track for the highest number of deliveries of the first month of any quarter.
Elon: We believe the $39,500 base Model 3 is an extremely compelling vehicle that the top ~40% of customers in North America and Europe can afford. We are seeing and expect to continue to see strong demand for Model 3.
Later in the Q&A, Model 3 demand and trims came up again:
Model 3 is not built to order like S and X are. Instead, popular variants are bundled together and built in batches to maximize production efficiency. After being built, specific vehicles are matched up to customer orders and dispatched accordingly.
“Our goal, as we’ve been very clear about since starting the company, is to make our cars as affordable as possible,” Musk said. Tesla thinks that the difference between 220 miles of range and 240 of range (in the Model 3 Standard Range vs the Model 3 Standard Range Plus) is more important than people realize. “The $39,500 Model 3 is spot on and we’re seeing consumers respond accordingly.”
Tesla Autopilot Safety
Adam Jonas asked when can we expect Tesla to get Autopilot safety figures validated (by regulatory bodies).
Elon: “Reporting in detail just gives those who are opposed to Tesla — they sort of, like, data mine the situation and try to turn a positive into a negative, so we’re just going to keep reporting what we report. We do give some more detailed information to insurance companies — to help with rates. …”
Tesla Insurance (Again)
Elon: “… as we launch our own insurance product, next month, we will certainly incorporate that information into the insurance rates. We essentially have a substantial information arbitrage opportunity where we have direct knowledge of the risk profile of customers, or the car. Then if they want to buy Tesla insurance, they have to agree to not drive the car in a crazy way. Or they can, but the insurance rate’s higher.”
Question: When will Tesla’s Energy business take off?
Elon: we have been pulling out all the stops in our battery production to keep our automotive business on track. We expect to be able to dedicate 5-10% of cell output to the energy business this year. There are far fewer cells in a Powerpack or Powerwall than in a car. Elon expects significant growth in Powerpack and Powerwall this year. “Something on the order of 300%,” Elon said.
Elon: we’re looking to scale solar roof tiles up significantly.
Model S & X
Deliveries of Model S and X were down significantly at 12,100 in Q1 versus guidance of 25,000 vehicles per quarter. Why? Cannibalization from Model 3?
No, only about 3.5% of trade-ins for Model 3 are from Model S owners. Model S owners mostly just want to trade in for Model S, or Model X. This drop was largely due to three factors:
- The pull forward of demand into Q4 2018 due to the step down of the US federal tax credit.
- The elimination of the 75kWh battery pack for S and X.
- Seasonally low automotive sales in Q1 vs Q4.
Also noted elsewhere, S & X production lines were cut back in order to prepare for the S & X upgrades just announced yesterday.
Also noted repeatedly, Elon expects S & X demand to rise back to ~100,000 a units a year.
Cash and cash equivalents are down $1.5 billion to $2.2 billion due largely to the payment of the $920 million convertible note.
Question: Can you talk about the sale of credits to FCA in Europe?
Elon: It is a confidential deal, so we cannot comment on this.
Question: Can you share vehicle production and sales numbers quarterly to dilute the pressure on these quarterly financial milestones?
Elon: The data is still bumpy at the monthly level and this would cause more chaos as media companies and investors read too much into some of them. “That would increase the drama, not decrease it,” he said. “It just ends up being lumpy.”
Question: Do you estimate another pricing adjustment?
Elon: We don’t comment on future price changes.
Question: Looking at the 10K, you’ve consistently noted this $4.9 billion purchase obligation. Does this correlate to reaching the 35GWh rate? Can you adjust this?
Answer: The purchase obligation is for the entire contract for Panasonic. This is going to take a couple of years to hit.
Tesla’s increased focus on capital efficiency has permeated the company and resulted in a fundamental shift in company culture. Tesla will build the Shanghai Gigafactory with $500 million in capital, which is a significant improvement over Gigafactory 1 spending.
Question: Do you have a battery supplier for the Shanghai Gigafactory yet?
Elon: Progress at the Shanghai Gigafactory is going extremely well. It looks like we’ll reach volume production at the end of this year at 1,000 cars per week, maybe 2,000. That’s what it looks like right now. We expect to have multiple cell suppliers for Shanghai Giga.